Industrial Organization

AG BM 102

Introduction

• Willard’s Mistake

• Competitive Environment

• Relevant Market

• Market power

• Market structure – Market Conduct-Market performance

Market Structure – those characteristics of the market that significantly affect the behavior and interaction of buyers and sellers

Tyson22%

Sanderson's6%

Pilgrim's Pride19%

Perdue7%

Rest46%

Share of Chicken Market, 2011

Source: Watt Poultry, USA

Tyson21%

Cargill22%

Swift21%

National Beef10%

Other26%

Share of Beef Market, 2010

Source: Cattle Buyers Weekly

Tyson17%

Smithfield28%

Swift11%

Cargill9%

Hormel8%

Other27%

Share of Pork Market, 2009

Source: National Pork Board

Market Conduct – a firm’s policies toward its market and toward the moves made by its rivals in that market

Market Performance – how well does an industry do what society might reasonably expect it to do

Market – a collection of firms, each of which is supplying products that have some degree of substitutability, to the same potential buyers

• Common buyers for sellers

• Common sellers for buyers

• Relatively homogeneous product

Industry- sellers of a particular product or closely competing products

Relevant market – the portion of the total market that a participant views as including his or her direct competitors and customers (or suppliers)

Some market models

• Pure competition

• Monopoly – a single seller

• Monopsony – a single buyer

Marginal RevenueThe change in total revenue from expanding sales by one

more unit

Marginal revenue

Quantity Price Total Revenue

Marginal Revenue

1 11 11

9

2 10 20

7

3 9 27

5

4 8 32

Calculating Marginal Revenue

Q = 12 - P

TR = PQ

P = 12 - Q

TR = (12 - Q) Q = 12Q - Q2

MR = D(TR)/D(Q) = 12 - 2Q

MC = MR

Calculating Marginal Revenue

• Solve the demand function for P

• P = 12 –Q

• Take the coefficient of Q and double it

• MR = 12 – 2Q

Monopoly

Quantity Demand

Price

Marginal

Revenue

Marginal

Cost

1 11 10 1

2 10 8 2

3 9 6 3

4 8 4 4

5 7 2 5

6 6 0 6

7 5 -2 7

For Monopoly, find where MC =MR

and then go up to the price on the demand curve

Marginal Factor CostThe change in total factor cost from buying one additional unit

of an input

Marginal Factor Cost

Quantity Price Total Expenditure

Marginal

Expenditure

1 1 1

3

2 2 4

5

3 3 9

7

4 4 16

Calculating Marginal Factor Cost

P = Q

TC = PQ = Q2

MFC = D(TC)/D(Q) = 2Q

Calculating Marginal Factor Cost

• Solve the Supply curve for P

• P = Q

• Double the coefficient of Q

• MFC = 2Q

• Ordinarily the line doesn’t run through the origin

• The process is the same – solve for P – double the coefficient of Q

Monopsony

Quantity Supply Price Marginal

Factor Cost

Marginal Value Product

1 1 2 11

2 2 4 10

3 3 6 9

4 4 8 8

5 5 10 7

6 6 12 6

For Monopsony, find where MFC =MVP

and then go down to the price on the supply curve

Concluding Comments

• Where does a 500 pound gorilla sit?

• Market power is important

• Understanding it helps you understand market behavior